RBA Saw Signs Low Rates Working as It Keeps Cut Option: Economy

The Aussie dollar is about 6 percent overvalued at present, based on models the Reserve Bank of Australia is likely to employ, UBS AG estimated in a report last week. Photographer: Carla Gottgens/Bloomberg

Nov. 19 (Bloomberg) -- Australia’s central bank said there
was “mounting evidence” interest-rate cuts were working, even
as it retained the option of loosening policy to support growth
in an economy battling an “uncomfortably high” currency.

“Given the substantial degree of policy stimulus that had
been imparted, it was prudent to hold the cash rate steady while
continuing to gauge the effects, but not to close off the
possibility of reducing it further should that be appropriate,”
the Reserve Bank of Australia said in minutes of its Nov. 5
meeting released in Sydney today.

Policy makers are balancing rising home prices against a
high currency that’s weighing on industries such as
manufacturing. Governor Glenn Stevens and his board reduced
borrowing costs by 2.25 percentage points in the past two years
to a record-low 2.5 percent to boost employment-intensive parts
of the economy outside of resources, where investment is waning.

“They’ve still got that gentle easing bias in there,”
said Tom Kennedy, an economist in Sydney at JPMorgan Chase & Co.
“The dollar is very influential for the RBA as a lower dollar
would assist rebalancing away from resource-led growth towards
the more traditional sectors of the economy.”

The Australian dollar climbed to 93.83 U.S. cents at 12:22
p.m. in Sydney, from 93.65 cents before the minutes were
released.

“There was mounting evidence that monetary policy was
supporting activity in interest-sensitive sectors and asset
values, and given the lags with which monetary policy operates,
the stimulatory effects would likely continue coming through for
some time,” the minutes said.

“At the same time, inflation remained within the target
and the Australian dollar, while below its level earlier in the
year, remained uncomfortably high,” policy makers said.
“Members noted that a lower level of the exchange rate would
likely be needed to achieve balanced growth in the economy.”

Overvalued Aussie

The Aussie dollar is about 6 percent overvalued at present,
based on models the RBA is likely to employ, UBS AG estimated in
a report last week. The central bank this month forecast below-trend growth and rising unemployment in 2014, with prices held
in check as wage growth remains subdued.

Elsewhere, Japan is scheduled to report department store
sales for October, while construction output data for the euro
zone in September is due for release. In the U.S., the
employment cost index likely climbed 0.5 percent in the third
quarter, according to the median forecast in a Bloomberg survey
of economists.

A September election that ended a hung parliament and low
rates have improved households’ outlook, with a private report
last week showing consumer confidence rose 1.9 percent in
November. Government data also showed September loan approvals
rose more than economists forecast.

Housing Recovery

“A range of indicators showed that dwelling investment was
picking up and this was likely to continue,” the RBA said. “In
time, non-resources business investment was also expected to
increase.”

Australian employers cut full-time workers in October by
the most in more than a year and unemployment held at a revised
5.7 percent, government data released Nov. 7 showed.

While labor market conditions “remained soft,” the RBA
said “there were recent signs that a number of forward-looking
indicators of employment growth were no longer declining.”